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Starwood Hotels & Resorts Worldwide (NYSE: HOT) owns and operates luxury hotels, retreats, and residences across the world. Approximately half of Starwood's hotels are outside of North America, with 397 in Europe, Africa, the Middle East, and Asia^[1] and new Starwood hotels are being built in developing countries like China.^[2][3] Starting in 2006, the company began to transition from being an owner of of hotels to a manager and franchiser of hotels. Between 2006 and 2008 the company sold billions worth of real estate. By the end of 2008 the company only owned 68 of the 942 hotels that operate under its various brand names - St. Regis, The Luxury Collection, W, Westin, Le Méridien, Sheraton, Four Points, Aloft, and Element.^[1] Because the company receives management and franchise fees regardless of actual hotel performance, operating as franchiser and hotel management company introduces a measure of stability into the company's earnings. In addition to its traditional hotel business, Starwood is involved in selling timeshare properties and residential properties.^[4]

Starwood's markets its hotels under luxury brands, competing for customers on the basis of perceived quality rather than price.^[5] This strategy works best in economies characterized by healthy levels of business travel and vacationers can afford to pay more for Starwood-branded hotels. HOT's brand name focus has been undermined by internet booking agencies that help customers select hotels based on price and star ratings instead of brand names.^[6]

Although the company sustained revenue, net income, and RevPAR growth throughout the first three quarters of 2008,^[7][8] Starwood executives cited net losses in the second half of Quarter 3 2008 due to the ongoing recession in the U.S. and other core markets^[9] Starwood was able to maintain profitability on both an operating income and net income basis in fiscal year 2008 and into 1Q2009; however, net income was down by almost 40% in 2008 as compared to 2007.^[10] In 2009, RevPAR decreased 20% due to hard hits in the upscale and luxury hotel segments, which generate 95% of the Starwood's revenue. ^[11] Moreover, the company's push into Asia, particularly China, is a major part of its strategy for future growth. Slowing economic growth, in these countries has the potential to make these investments less profitable in the near term.

Business Overview

Starwood - one of the world’s largest hotel companies - uses its nine brand names to conduct business directly and through subsidiaries.^[5] The company primarily generates income through its traditional hotel business but also makes money by selling timeshares and residential properties.^[4] While over half of the company's 968 properties are in North America, HOT has properties in all six habitable continents.^[1] Starwood's strategy focuses on decreasing exposure to direct real estate investment and increasing hotel management and franchise agreements which management believes will be more profitable;^[5] as a result, the company has sold 56 properties for over $5 billion total since 2006, including The Westin Turnberry in 4Q2008 for net cash proceeds of $99 million.^[12]

As of 2009, 95% of all of Starwood's hotel net income comes from upper upscale and luxury hotels. The rest come from its other hotel divisions.^[11] This single and source of income poses risk during economic downturns such as the 2008 and 2009 financial crisis. During the 2009 recession, luxury hotels throughout the world were hit the hardest among all hotels, causing Starwood's 20% decrease in RevPAR.^[11]

Business & Financial Metrics

In 2008 Quarter 3, HOT exceeded its earnings expectations in spite of slow RevPAR growth by making aggressive cost cuts on the hotel and administration levels in response to a worsening general economic climate.^[9] Before the quarter was over, however, the rate at which groups booked rooms slowed for 2008 and 2009, cancellations spiked up, and transient booking dropped;^[9] the 2008 economic slowdown caught up with Starwood.

RevPar decrease in 2009^[11]

In the final quarter of 2008, HOT generated a net income of only $79 million,^[37] down from $146 million from Q4 2007.^[37] The company's revenue fell 17% to 1.33 billion and the company's RevPAR fell 12.1% as less and less travelers filed into Starwood's hotels.^[37] The company's vacation ownership and residential sales revenues were halved during the quarter as the real estate market continued to struggle.^[37] After releasing its earnings, HOT said that it foresees a significant fall in worldwide RevPAR in the hotel business during 2009 and is "significantly scaling back" its expenditures as a result.^[37] As expected, RevPAR for 2009 decreased by 20%.^[11] EBITDA decreased by 55% for 2009 as well.^[11]

Despite the fact that Starwood was able to maintain profitability in the first quarter of 2009, there was a precipitous drop in net income of 87.10% from $31 million in 1Q08 to $4 million on 1Q09.^[22] Although revenue fell by 23.74%, far less than the drop in net income, the company had a $19 million restructuring charge in 1Q09 as compared to $8 million in 1Q08, which was due to Starwood's attempt to offset slowing growth with lower costs.^[38] The impact of the recession is clearly reflected on Starwood's occupancy rates and RevPAR for 1Q09 relative to 1Q08. Worldwide occupancy fell by 10.2 percentage points to 60.0% and RevPAR fell by 30.7% to $117.78.^[22]

Although Starwood is in an industry that is particularly sensitive to economic recessions, the company had net income growth of 27.6% in 2Q09 as compared to 2Q08.^[39] The diminution of demand and real estate prices is reflected in the 23.4% decrease in operating revenue for 2Q09, to $1.205 billion; however, operating expense for the quarter fell by 19.6%, which illustrates Starwood's ability to scale back costs when faced with an unfavorable environment. Selling, General & Administrative Expenses (SG&A) and vacation ownership and residential expenses fell by 30.4% and 38.4%, respectively.^[39] The impact of the recession can be seen in Starwood's Revenue Per Available Room (RevPAR) and Occupancy Rate, which dropped by 27.7% and 810 Basis point (bps), respectively.^[39] However, the damage to RevPAR is slowly decreasing. RevPAR growth for the 2nd, 3rd, and 4th quarter of 2009 were -30%, -20%, and -7% respectively.^[11]

Starwood reported net income of $40 million in 3Q09, despite a 20% decline in revenue as compared to a 14% decline in expenses.^[40] The global recession's effect on travel can be seen in the 44.2% fall in Starwood's revenue from vacation ownership and residential sales.^[40] While RevPAR fell 23.3% in both the North America and International segments, occupancy in International fell by 7.6% as compared to the 1.5% fall in the North America market.^[40] This is due to a reduction in the average daily rate of 21.8% in North America in response to falling demand, whereas internationally, Starwood reduced prices by 13.6%.^[40] During the quarter, Starwood repaid $1.080 of long-term debt, which led to a reduction of the company's Debt to Equity ratio from 4.90 to 3.78 in 3Q09.^[40] By the end of 2009, Starwood paid off $1.1 billion dollars of debt, leaving $3 billion in debt. ^[11]

In 2008, the sale and closure of 19 hotels that had been previously wholly owned by Starwood, as well as decreased demand related to the economy resulted in revenue and net income losses for the company. Overall, revenue fell by 4%, but operating income and net income fell by 27.86% and 39.30%, respectively.^[47] The decline in revenue was led by vacation ownership and residential operations, which fell 27% to $749 million.^[48] In order to offset falling demand, which was manifest in an occupancy rate of 71.1% in 2008 compared to 72.7% in 2007, Starwood increased its average daily rate by 1% to 237.45. However, Revenue Per Available Room (RevPAR) still fell by 1.2% to $168.93.^[48]

Business Segments

Hotels and Vacation Ownership (84.87% of total revenue):^[49] Includes a worldwide network of owned, leased, and consolidated joint venture hotels and resorts.^[4] These properties are generally operated under HOT's proprietary brand names like St. Regis, The Luxury Collection, Sheraton, Westin, W, Le Méridien, and Four Points.^[4] Sometimes properties are owned or operated independently but HOT collects fees for the use of its brand names.^[4] As of 2009, 95% of the total net income from this segment comes from the upper upscale and luxury hotels.^[11]

Residential Operations (15.13% of total revenue):^[49] Develops, owns, and operates timeshare properties and provides financing to its customers.^[4] Additionally, this segment generates income through licensing fees from branded properties and by selling residential properties.^[4]

Trends & Forces

Demand for Starwood's luxury hotels is cyclical

Since HOT primarily operates luxury and upscale hotels,^[3] demand for its offerings are dropping as businesses and leisure travelers have less money to spend. As businesses looked for ways to cut costs in the worsening economic climate, business travel decreased significantly in 2008^[50] - this means fewer business travelers filing into HOT hotels. Furthermore, many companies are avoiding hosting meetings at luxury hotels as the economic climate worsens to maintain good public relations.^[51] Vacationers are also staying home and a nationwide travel forecast survey predicted a 1.3% drop in leisure travel during 2009.^[52] Fewer travelers and tighter budgets mean less business for Starwood Hotels. The company has been cutting its costs and staff in response to the economic slowdown that included the layoff of 18% of its Westin and Sheraton Grand Bahama Our Lucaya Resort employees in January 2009.^[53]

Internet reservation websites have the upper hand over Starwood

Internet bookings made by third party companies like Expedia and Travelocity have been growing at rates of up to 20% per quarter.^[54] As more bookings are completed by third parties, the intermediary companies can obtain higher commissions, reduced room rates, or other significant contract concessions from hotel operators; the sheer volume of bookings they make gives them bargaining power over HOT.^[6] These companies also promote the importance of price and anonymous quality indicators (like star ratings) over brand identification in the hotel selection process;^[6] this prevents HOT from fulfilling its brand establishment goals.^[6] Although HOT continues to generate most of its revenues through traditional booking channels and its own website, the rise of these websites impacts Starwood's profitability.^[6]

Starwood's increased presence in China means exposure to Chinese economic slowdown

Between 2008 and 2012, Starwood will open 63 hotels in China and others in nearby countries.^[55] As Starwood sells many of its older hotels to decrease its real estate investments,^[5] the impact that these new hotels will have on the company increases. Although it enjoyed a boom during the past decade,^[56] China's economy is stalling; exports fell 2.8% and imports dropped 21.3% from December 2007 to December 2008.^[57] The general economic situation is causing civic unrest throughout the country^[58] and millions of Chinese workers are losing their jobs.^[57]

Competition

Starwood competes with global players in the hotel industry, such as:

• Marriott International: A hospitality company that, under 15 brand names, operates and franchises hotels and related lodging facilities worldwide.^[59]
• Wynn Resorts: Develops, owns, and operates destination casino resorts.^[60] Operates through the Wynn Las Vegas and Wynn Macau casino resorts.^[60]
• Trump Entertainment Resorts: Owns and operates casino hotel properties in the United States.^[61] In its 3 casino hotel properties, it offers gaming, casino resort, and entertainment services.^[61]
• InterContinental Hotels: Owns, franchises, manages, and leases hotels and resorts under seven brand names in 100 countries and territories .^[62]
• Orient-Express Hotels (OEH): A worldwide corporation that engages in real estate and residential property development and invests in individual deluxe hotels, restaurants, tourist trains, and river cruise businesses.^[63]

Companies operating in this industry generally compete on the basis of quality and consistency of rooms, restaurants, meeting facilities and services; other factors include attractiveness of locations, availability of a global distribution system, and price. Starwood seeks to maintain a global presence which will offer equal quality of service to its customers throughout the world.^[5] Unlike many of its competitors that attract customers with low costs, Starwood's strategy focuses less on keeping rates low and more on the development of brand names to draw in revenue.^[5]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} HOT 2008 10-K, Item 1
2. ↑ Starwood's Aggressive China Expansion Hits 100 Hotels (August 4, 2008).
3. ↑ ^{3.0 3.1} Yahoo! Finance Profile: HOT
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} HOT 2007 10-K pg. F-44  
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5} Starwood: Company Overview
6. ↑ ^{6.0 6.1 6.2 6.3 6.4} HOT 2007 10-K pg. 11  
7. ↑ ^{7.0 7.1 7.2} HOT 08Q3 10-Q pg. 4  
8. ↑ ^{8.0 8.1} HOT 08Q3 10-Q pg. 32  
9. ↑ ^{9.0 9.1 9.2} Starwood Hotels & Resorts Worldwide, Inc. Q3 2008 Earnings Call Transcript.
10. ↑ ^{10.0 10.1 10.2} HOT 2008 10-K, Item 6
11. ↑ ^{11.0 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8} [SeekingAlpha: HOT 2009 4th Quarter Earnings Call Transcript http://seekingalpha.com/article/186762-starwood-hotels-amp-resorts-worldwide-q4-2009-earnings-call-transcript?page=-1]
12. ↑ HOT 2008 10-K, Note 5, F-19-20
13. ↑ HOT 08Q1 10-Q pg. 24  
14. ↑ HOT 08Q2 10-Q pg. 27  
15. ↑ ^{15.0 15.1} HOT 08Q3 10-Q pg. 27  
16. ↑ ^{16.0 16.1 16.2} HOT January 2009 8-K pg. 16  
17. ↑ HOT 09Q1 10-Q pg. 25  
18. ↑ HOT 2Q09 10-Q Results of Operations
19. ↑ HOT 3Q09 10-Q Results of Operations
20. ↑ ^{20.0 20.1} HOT 08Q1 10-Q pg. 26  
21. ↑ HOT 08Q2 10-Q pg. 32  
22. ↑ ^{22.0 22.1 22.2 22.3}
23. ↑ HOT 2Q09 10-Q Results of Operations
24. ↑ HOT 3Q09 10-Q Results of Operations
25. ↑ HOT 08Q2 10-Q pg. 35  
26. ↑ HOT 2Q09 10-Q Results of Operations
27. ↑ HOT 3Q09 10-Q Results of Operations
28. ↑ ^{28.0 28.1} HOT 08Q1 10-Q pg. 4  
29. ↑ ^{29.0 29.1} HOT 08Q2 10-Q pg. 4  
30. ↑ ^{30.0 30.1} HOT January 2009 8-K pg. 11  
31. ↑
32. ↑ Google Finance: HOT Income Statement
33. ↑ Google Finance: HOT Income Statement
34. ↑ HOT 1Q 2009 10-Q, pg. 4
35. ↑ Google Finance: HOT Income Statement
36. ↑ Google Finance: HOT Income Statement
37. ↑ ^{37.0 37.1 37.2 37.3 37.4} William Spain (January 29, 2009). Starwood reports sharply lower revenue, profit.
38. ↑ HOT 2009 1Q 10-Q, pg. 13
39. ↑ ^{39.0 39.1 39.2} HOT 2Q09 8-K
40. ↑ ^{40.0 40.1 40.2 40.3 40.4} HOT 2009 3Q 10-Q
41. ↑ ^{41.0 41.1 41.2 41.3 41.4} HOT 2005 10-K pg. 19  
42. ↑ ^{42.0 42.1} HOT 2006 10-K pg. 4  
43. ↑ ^{43.0 43.1} HOT 2007 10-K pg. 18  
44. ↑ ^{44.0 44.1 44.2 44.3 44.4 44.5} HOT 2007 10-K pg. 21  
45. ↑ ^{45.0 45.1 45.2} HOT 2008 10-K, Item 2
46. ↑ ^{46.0 46.1 46.2 46.3 46.4 46.5} HOT 2007 10-K pg. F-4  
47. ↑ HOT 2008 10-K, Item 6
48. ↑ ^{48.0 48.1} HOT 2008 10-K, pg. 32
49. ↑ ^{49.0 49.1} HOT 2007 10-K pg. F-45  
50. ↑ Susan J. Campbell (November 18, 2008). Study Finds Decrease in Business Travel, Increase in Teleconferencing.
51. ↑ Deena Beasley (January 30, 2009). Luxury hotels turn taboo for corporate travelers. Reuters.
52. ↑ Nadia Vanderhoof (October 31, 2008). Forecast predicts drop in leisure travel in 2009.
53. ↑ Bahamas resort lays off 181 as crisis cuts tourism (January 25, 2009).
54. ↑ Kyle Peterson (May 1, 2008). Expedia profit rises as bookings increase.
55. ↑ New Starwood Hotels & Resorts: Asia Pacific
56. ↑ Jim Jubak (February 6, 2007). Time running out on China's boom.
57. ↑ ^{57.0 57.1} Keith Bradsher (January 12, 2009). Trade Losses Rise in China, Threatening Jobs.
58. ↑ Shai Oster (December 22, 2008). China Faces Unrest as Economy Falters.
59. ↑ Yahoo! Finance Profile: Marriott International, Inc.
60. ↑ ^{60.0 60.1} Yahoo! Finance Profile: Wynn Resorts
61. ↑ ^{61.0 61.1} Yahoo! Finance Profile: Trump Entertainment Resorts
62. ↑ Yahoo! Finance Profile: Intercontinental Hotels Group
63. ↑ Yahoo! Finance: Orient-Express Hotels
64. ↑ HOT 2008 10-K
65. ↑ MAR 2008 10-K
66. ↑ WYNN 2008 10-K
67. ↑ TRMP 2008 10-K
68. ↑ IHG 2008 20-F
69. ↑ OEH 2008 10-K